An estimation of the systematic return risk at the Nairobi Stock Exchange

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Abstract

Investors are mainly interested in knowing the degree of risk exposure in any investment
undertaking or set of undertakings. They are also interested in how much return they would
receive in exchange for their investment funds Academicians and other parties also have a
stake in these market parameters. These serve as yardsticks in determining which market or
asset portfolio to invest in.
This research project intended to measure the market risk and return for the Nairobi
Stock Exchange. Secondary data on forty six quoted companies was utilised to compute the
various market parameters.
The results obtained revealed a market risk of3.55% and a market return of 14.80%. The
market return of J 4.8% added to the coupon rate on the one-year Central Bank of Kenya
Treasury Bonds of 150% gives a total of298(Yo This does not deviate much from the
general market interest rates ranged between 28% and 32% towards the end of 1997.
The coupon rate on Central Bank of Kenya Treasury Bonds that is currently applicable is
that of one-year Floating Rate Treasury Bonds whose coupons are based on the 91 day
Treasury Bill rate. This will affect returns on equity portfolios because investors make rational decisions based on a set of available investments. The effect of the one-year Floating Rate
Treasury Bonds will be to suppress the return that could be obtained from equities due (0 the
high yields on these bonds.